Leading data point to improvement

Factories growing again, but market disappointed anyway

WASHINGTON (CBS.MW) -- Two forward-looking reports released Thursday show the economy is slowly improving, but investors seemed miffed that the economic numbers weren't stronger.

An important gauge of manufacturing sentiment showed the factory sector expanded in June for the first time in four months in the Philadelphia region. Meanwhile, the Conference Board said the May index of leading indicators "finally" point to a recovery.

Even the labor market might be getting a little better. Initial jobless claims fell in the latest week and over the past four weeks, although continuing claims hit a 20-year high. See full story.

The number that hit the market hardest came at noon Eastern time, when the Philadelphia Federal Reserve Bank said its business index rose to 4.0 in June from negative 4.8 in May, the first positive reading since February.

The index is based on surveys of manufacturers in eastern Pennsylvania, Delaware and southern New Jersey. Read the full release.

Positive readings indicate expansion in the sector.

The increase matched the published consensus expectations on Wall Street, though it fell short of so-called "whisper numbers" of an increase into the teens following a surprisingly strong gain in the similar survey from the New York Fed earlier this week. See full story on the Empire State index.

"This is not bad," said Ian Shepherdson, chief U.S. economist at High Frequency Economics, of the Philly Fed. "But it is disappointing in the wake of the huge rise in the Empire State survey."

"This report will not damp the revival of expectations for 50 [basis- point cut] from the Fed," Shepherdson said.

"The leading economic index finally points to a recovery, almost a year and a half after the end of the recession," said Ken Goldstein, economist at the board.

"But the dangers present in the first five months of the year have not disappeared completely," Goldstein said. "Chief among them is a lack of business confidence."

Eight of the 10 leading indicators increased in May, led by money supply, consumer expectations and stock prices. The yield curve was flatter, which is usually a negative for growth. But in this case, the flattened curve merely signals the Fed's determination to drive long-term interest rates low enough to ignite the economy.

The details of the Philly Fed index weren't quite so positive.

Although they improved from May, new orders and shipments both remained just below zero. New orders rose to negative 0.5 from negative 3.8. Shipments rose to negative 1.2 from negative 2.3.

Unfilled orders rose to a one-year high of 7.9 from negative 7.4, a hopeful sign that factories will be forced to ramp up production to keep customers satisfied.

Prices received dropped to negative 9.5 from 2.1, reviving the deflation story. Prices paid dropped to 5.8 from 8.9.

Expectations climbed, with more than 60 percent of firms saying they expect business to improve in the next six months. The expectations index rose to 52.8 from 45.2. Expectations for capital spending remained subdued at 12.3.

The Philly Fed survey is followed closely, in part, because it seems to forecast national sentiment in the manufacturing sector. The national index will be released in about two weeks by the Institute for Supply Management.

The ISM index, in turn, is known to be a favorite of Alan Greenspan and other Fed officials.

"Based on the Philly Fed and N.Y. Empire Survey, the ISM index does look likely to cross the 50-mark to around 52.0 in June from 49.4 in May," said David Rosenberg, chief economist at Merrill Lynch. "But manufacturing activity is far from brisk."

A reading of 50 or above in the ISM indicates growth in the factory sector.

The Federal Open Market Committee meets next Tuesday and Wednesday. Markets expect the FOMC will cut its overnight federal funds rate from the current 1.25 percent to 1 percent or perhaps even lower to boost demand and ensure that deflation does not take hold in the economy.

Expectations for a 50 basis-point cut to 0.75 percent grew Thursday after John Berry of the Washington Post reported that a larger cut was somewhat more likely. Berry has been known to be a conduit for Fed guidance through the press, although there was nothing in his story that suggested a late-night call from his anonymous source, known around town as Deep Cut.

In a separate report, the Commerce Department said the current account deficit widened to $136.1 billion in the first quarter from $128.6 billion in the fourth quarter of 2002. See full story.

Rex
Nutting

Rex Nutting is a columnist and MarketWatch's international commentary editor, based in Washington. Follow him on Twitter @RexNutting.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.